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The Growth of P2P Lending: Is It Sustainable?

 4 min read / 

It has drawn swinging criticism by city heavyweights such as the former head of the FSA Lord Adair Turner and is consistently a divisive issue amongst financial commentators. Yet, the peer-to-peer lending sector is continuing to grab headlines with its explosive growth rate. How fast exactly? According to data gathered by AltFi lending volumes through P2P platforms achieved a staggering compounded annual growth rate of 110% between 2011 and 2016 and shows little sign of letting up this year.

Source: AltFi Data

 

Despite such impressive growth, there is scepticism that the industry can maintain momentum in the medium term. The 2008 financial crisis left in its wake a perfect macroeconomic environment for the sector to thrive. Rock-bottom interest rates and risk-averse banks have provided an ample supply of both credit hungry borrowers and yield-seeking lenders to fuel the industry. However, there are some indications this honeymoon period for the industry may be over as the UK’s inflation rate hit 3.0% last month piling pressure on the Bank of England to raise interest rates. This is an understandable worry for the industry, as much of the lending it facilitates is higher risk than that of the traditional banking sector.

Critics also point to the economic fall out of last year’s Brexit vote that is showing signs of stifling business borrowing, which has up to now been the fastest growing segment of P2P lending. However, the double-headed Brexit dragon of real income stagnation and falling consumer confidence is failing to significantly dampen UK house prices or housing demand. Property development makes up a significant part of P2P lending volumes and robustness in this segment will prove an important boon for the industry.

 

Furthermore, there are several emerging industry trends, which are likely to boost its resilience to deteriorating economic circumstances.

 

  1. Consolidation- While nearly 100 platforms are operating in the UK a resilient oligopoly is emerging. This is made up of the markets four largest lenders: Zopa; Funding Circle; LendInvest and Rate Setter who cumulatively facilitate over 70% of lending volume. As the sector continues to mature and venture capital interest begins to wane it seems likely these firms will continue to cement their grip on the sector. Speaking to the Business insider P2P lender Funding Options CEO Conrad Ford stated:

     

    “It’s relatively inconceivable that we won’t have some platforms going under.”

     

  1. Securitisation- This may well prove critical for the sectors future success. The liquidity provided by securitising P2P loans should help encourage greater investment by the larger traditional fixed income investment institutions such as pension funds. Several of the market’s leading platforms initiated the securitisation of loans originating through their platforms for the first time last year. Previously, P2P platforms lacked the scale to make securitisation economic and this new trend will likely provide a further edge to the industries established participants.
  1. Diversification- There are clear indications that P2P lenders are seeking to broaden the services they offer. Last year Zopa, the current UK P2P market leader, announced plans to apply for a banking licence and launch a ‘next generation bank’ to complement its P2P lending service. Such a move has the dual benefit of helping to drive growth for the firms P2P lending services as well as providing the security of a diversified revenue stream. It seems highly unlikely Zopa’s competitors will not follow suit in some shape or form in the near future.

Conclusion

P2P lenders have managed to capitalise on innovative proprietary fintech, an increasingly tech-savvy consumer base, and shifting consumer preferences to conduct business online. Consequently whilst still a relative minnow in the financial industry P2P lenders have made great strides towards embedding themselves as an established investment medium. However, some firms will undoubtedly fold. It seems likely the industry’s leading firms will be able to adapt to changes in the economic climate and continue to take market share from the financial establishment.

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Companies

Carillion’s Collapse: It’s The Management, Stupid!

 5 min read / 

Carillion Collapse Management

When UK-based construction company Carillion PLC finally hit the buffers after months of pointless government efforts to prop up the public sector contractor, it wasn’t long before the finger of blame again pointed to Public Private Partnership (PPP) projects for the financial mess.

It’s a familiar argument that is promoted reflexively in a lot of the UK press because it fits an anti-corporate narrative. It follows the line that when public authorities invite private sector businesses to design, build and operate a public asset, the result will be huge profits for the contractor, its bankers and its shareholders while the public sector carries the bag for bailing out projects when they fail.

In the case of Carillion, that narrative got a boost from a National Audit Office report this week that stated that there’s still insufficient evidence to show that the UK’s Private Finance Initiative (PFI) program delivers value for money. It also said that the cost of PPP/PFI to taxpayers comes to £200bn, a particularly uninformative claim, considering that the equivalent public sector contracting almost always goes over budget and costs taxpayers untold billions of pounds through inefficiency, non-delivery and cost overruns, yet is rarely reported about in the press.

Boost for Nationalist Agenda

The NAO report will boost the Labour Party’s current position that all such projects should be nationalized, whatever the cost.

The only problem with the way that this has been reported is that PFI is not why Carillion collapsed.

In fact, the main reasons for Carillion’s collapse are that it failed to deliver on a wide range of contracted services, so it wasn’t being paid, even as it took on more projects and more and more debt, estimated to total £900m. The company also continued to boost dividends, despite a widening pension deficit, which now sits at £587m. Finally, Carillion incurred cost overruns and delays in the delivery of many public sector projects, of which only three were PFI.

The idea that PFI was to blame for Carillion’s collapse and that taxpayers are now on the hook for the many public sector projects is going to stick, even though it’s nearly as inaccurate as the claim that the company, its investors and its bank finance providers are profiting from the company’s demise.

The Guardian, for example, singled out three PFI investments, including two troubled hospital construction projects, for their contribution to the collapse of the company. These included the £335m rebuilding of the Royal Liverpool University Hospital and the £350m Midland Metropolitan Hospital, both of which ran into expensive delays.

But the media focus on Carillion’s mishandling of three PFI contracts ignores the larger issue, which is the company’s own inability to manage risks associated with the delivery of any of its services. 

There is a legitimate debate around whether PFI and its successor, PF2, deliver value for money to public sector institutions such as The National Health Service (NHS). This is because of the higher financing costs for private sector borrowing and thus the significantly higher cost to NHS trusts of having the private sector operate and maintain these assets once they are built.

Bottom Line Focus

At the end of the day, what matters most is the company’s ability to deliver. We’ve seen this before when another opportunistic PFI company, Jarvis, got in over its head and collapsed.

There have been more than 130 health-related PPP projects in the UK since the PFI scheme was established in 1992. Almost all of the large hospital projects were delivered on time and on budget using PFI during the Labour government from 2001 to 2010. This was followed by a sharp fall in waiting lists for surgery and other essential healthcare services across the country.

The issue in this instance should not be the delivery model, but rather the company that is responsible. In Carillion’s case, there is ample evidence that when it came to running the projects that were at the core of its business, nobody effectively managed the rising costs and declining receivables, even as they inexcusably boosted the dividend in each of the 16 years since the company was founded.

The end result, while enriching a few investors, was a precipitous share price decline since the middle of 2017 that more than erased those gains. The company’s lenders are also reported to have started writing down the £835m of committed bank facilities and £140m in short-term facilities, though their exposure could be much higher.

 

Own Work

Business as Usual?

Despite all the handwringing, there is no shortage of public sector contractors who will happily take over the many public sector construction and support service contracts that Carillion’s collapse will require the government to put up for tender.

This will follow an established protocol that is designed to ensure that essential services are not interrupted. The larger, more troubled Carillion projects will take longer to renegotiate but will ultimately find replacement companies to deliver them. Work interruptions are likely to be limited, and people who have been laid off as a result of the collapse will quickly find new work, particularly given the current healthy state of the labour market. The takeaway from all of this is simply that bad businesses, whatever their line of work, go to the wall and better ones replace them.

Keep reading |  5 min read

Companies

Whatsapp Launches New Venture Aimed at Businesses

 1 min read / 

whatsapp business

Whatsapp has launched a new app targeted at businesses, called the Whatsapp Business App, which they claim will enable companies to “communicate more efficiently” with present and potential customers.

This forms part of Whatsapp’s wider strategy to branch out into the corporate world. It plans to use the app to generate new revenue by charging businesses for using the extra communication tools that will enable them to better connect with their customers.

Although the app is set for worldwide release, at present it will only be available in Indonesia, Italy, Mexico, the UK and US. It includes a feature which indicates a business is authentic with a green tick badge next to their name.

Keep reading |  1 min read

Companies

Amex: Troubled Credit Card Company Reports $1.2bn Net Loss

 2 min read / 

Amex annual report

On Thursday, American Express, or Amex, reported a net loss of $1,197m in the fourth quarter, the first net loss the company has experienced for 26 years.

Although the company stated that revenue from interest expenses was up 10% to $8.8bn, Amex said recent reforms to the US tax code meant the company incurred extra costs, including a repatriation cost on its foreign assets as well as a devaluation of its deferred tax assets. It estimates total costs amounted to $2.6m.

For the full year, net income was $2.7bn compared with $5.4bn the company earned in 2017. However, even with the estimated $2.6m the company claims it incurred from the recent tax charge, net earnings were still $5.3bn, $100m lower compared to last year.

In New York, American Express shares (AXP) took a near 1% tumble at the beginning of trade with shares finishing the day on $99.90.  JPMorgan Chase and Goldman Sachs anticipate greater earnings for 2018.

“Overall, we believe the Tax Act will be a positive development for both the U.S. economy and American Express” said CEO and chairman Kenneth Chenault. Chenault also said he will be leaving Amex in “very strong hands” when his successor, Steve Squeri takes over next month.

American Express has suffered from an ever-reducing share in the credit card market and ended its 14-year relationship with American warehouse chain Costco who in 2016 made an agreement with the market leader, Visa.

Keep reading |  2 min read

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